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Greek Prime Minister Alexis Tsipras addressed the nation from Athens, Photo: Reuters
I thought they were about to agree a solution to all this?
So did (almost) everyone else. For the last fortnight Greece has been negotiating with the IMF and other Eurozone countries for 7.2 billion euros in new loans, to help pay old loans. The creditors were demanding that Greece make some reforms and cuts before they handed over the money.
While some warned that Greece was sleepwalking into a crisis by playing hardball in Brussels, others praised their bold approach to negotiations, their 'red lines' that they would not cross.
According to calculations by Reuters, Greece owes its official lenders 242.8 billion euros, with Germany its biggest creditor. Photo: Reuters
They figured Greece was bluffing. That they had to act crazy, give every impression they would push the button on default, otherwise they would again be steamrolled by the lenders and Euro zone countries. But few thought they would actually go through with it.
The collapse of the talks was met with shock and disbelief in northern Europe. They clearly thought that they were just a few hours of haggling, a few billion euros here and there, from agreement.
But it showed a wilful ignorance of the reality on the ground in Greece. Syriza was elected this year to change the script on negotiations with Europe. The Greeks sent their new government to Brussels with an ultimatum to get the country a better deal, not just a general mandate to 'give it another go' then settle for more austerity policies such as cuts to pensions, wages and public sector jobs.
People line up to withdraw cash from an automated teller machine on the island of Crete. Photo: Stefanos Rapanis
So what exactly is the problem?
Basically, Greece was hit hard by the financial crisis, and since then it has borrowed a lot of money that it says it can't pay back – at least not yet.
According to calculations by Reuters, it owes its official lenders 242.8 billion euros, with Germany its biggest creditor.
The lenders include the IMF (International Monetary Fund), the ECB (European Central Bank) and the Euro zone governments.
Many of the loans don't mature for years, even decades.
However some do. In particular, Greece was due to pay 1.6 billion euros to the IMF by the end of June in overdue interest. After that, 3.5 billion is due to the ECB on July 20, and another 3.2 billion in August.
On top of that, more than 8 billion euros in short-term bills are due over the next two months.
Greece says it has scraped together all the money it can to pay its debts – it even called in cash reserves from councils, hospitals and other public bodies. It says that, to pay the money owed, it would have had to stop paying money into pensions and public wages – which it refuses to do.
What happens if Greece doesn't get the rescue money?
Barring further surprises, it will default on at least some of its debts.
Sovereign default does have precedents, but it always comes with major economic upheaval.
Though the consequences of that are long-term (difficulty finding lenders willing to invest in the country), there will be immediate side-effects.
After months of massive withdrawals, fearing this very crisis, Greece's banks are surviving on emergency credit from the European Central Bank. Without that, they have had to impose capital controls to stop any more money going out.
Greek people will have less money they are able to spend. Business will be unable to invest. The economy will head into recession.
So far the Greek government has refused to countenance 'Grexit'. However if no new rescue deal is negotiated, Greece would have to supply the banks with money itself, or they will collapse.
But the government has no money. The only obvious solution is to start printing new money to get cash back into the economy.
This 'new drachma' would effectively mean Greece has left the euro – at least temporarily.
The 'new drachma', even if it began on parity with the euro, would quickly lose up to half its value. Essentially, the value of everything in the country would be halved.
There will be high inflation, and the new exchange rate would make imports much more expensive. Life will get even harder for ordinary Greeks and Greek businesses.
On the other hand, some economists say it would stimulate the local economy and, in the long run, leave the country stronger. There is fierce disagreement over this view.
Why would the Greek people possibly want this?
They are sick of austerity. Unemployment has sky-rocketed, wages halved, pensions were slashed, public bodies like hospitals, schools and universities starved of funds.
Many no longer believe that austerity is just a necessary, temporary measure to put the country back on its feet. They believe it is wrecking their economy and their lives. They are willing to take a risk and try something else.
Does it affect Australia?
A loss of faith in the Eurozone could make Australia more attractive to overseas investors, driving up the Australian dollar – hurting our export industries. On the other hand it could scare away investors and push down the dollar.
Either way, though, there would be widespread market instability, a loss of investor confidence and morale. None of which is good for business and growth.
How will all this affect other countries?
The euro is already tumbling on international markets.
If Greece defaults it leaves many of its neighbours short. Germany is owed 57 billion euros, France 43 billion, Italy 38 billion and Spain 25 billion – on top of those countries' contributions to the IMF loans.
The loans don't mature for almost 30 years, there is almost no interest on them and some of the loans came with a 10-year moratorium on interest payments, so it's not like the countries need the money back immediately. However it's still a lot to have to take off the bottom line.
Confidence in Europe, and the euro, has been profoundly shaken. Eyes will turn to the continent's other weak economies such as Portugal, Spain and Italy. They may start to lose capital and investment.
Is it just an economic problem?
This could also drastically change the political balance in Europe. If Syriza makes a success out of splitting Greece away from the rest of the continent, it will embolden other nationalistic parties such as the National Front in France or UKIP in the UK.
Future elections in Europe could see a surge in nationalism, a rejection of the European project, potentially enough to threaten Europe's stability as a political union.
Speaking of which, the UK is in the early stages of debate on a referendum on whether to stay in Europe, next year. If Europe is a basket case this time next year, public opinion (currently in favour of staying in) may drastically change.
Then there is the question of Russia. Syriza has already made overtures to the Kremlin, with Tsipras a star speaker at Putin's recent big international summit in St Petersburg.
If Russia comes to Greece's aid, with money, other support (or both), it will be a new factor in the current Cold War-like tensions between east and west.
Greece has already expressed its anger at Europe and NATO for not doing enough in its regular chest-bumping with Turkey. If Russian warships find a friendly berth in Greek ports, the strategic map of Europe is drastically redrawn.
What happens next?
The next set-piece is a referendum on Sunday, in which Greece votes to accept or reject the terms of the rescue deal most recently proffered in Brussels.
Between now and then, of course, anything could happen.
If the referendum takes place, and is a 'no', then Grexit appears all but inevitable.
On the other hand if it is a 'yes', then the Syriza government has effectively lost power. It will return to Brussels and hope that the deal is still on the table – which is not guaranteed. And after that, the country will probably pretty quickly go back to the polls to find a new government.
http://www.smh.com.au/business/world-business/greece-explainer-what-the-financial-crisis-means-20150628-gi05r2.html Comment: When you owe money, it is a big problem for you. Your future is no longer totally in your control. Your creditor can demand and you need to comply. When you owe a lot of money and cannot pay back, it becomes a huge problem for your creditors.